The traffic on Pakistani roads offers an
interesting mix of old and new, functional and sleek. It also shows
the increasing number of latest model passenger cars produced locally
by world renowned names which are increasingly replacing the older
generation of cars. In short, the car production in Pakistan shows
signs of coming to age with more range of models and variations
suitable for all types of personal budgets.

Pak Suzuki Motor, the producers of Suzuki vehicles,
started commercial production in January 1984. By early 1990s two
other Japanese car producers, Toyota and Honda, set up auto production
plants to cater to the big car segment of the market. Today there are
four active car producers — Suzuki, Indus Motor (the producer of
range of Toyota cars and 4-by-4 trucks as well as Daihatsu Cuore
cars), Honda and Dewan Farooque, the producer of Korean Kia cars.

These four car producers are competing against each
other in both the small and big car segment of the market. For
instance, Suzuki which entirely dominated the small car segment for
over 14 years today is facing competition not only from Daihatsu's
compact Cuore 850 cc car (commercial production started March 2000)
but also from Dewan Farooque Motors' Kia. On the other hand Suzuki's
1300 cc Baleno and Dewan Farooque's Hyundai Santro Plus are competing
for the share of big car segment in which Toyota in particular and
Honda in general plays the leading role.

The emerging situation at present is that all the
four car producers — three of them Japanese and one Korean — are
competing against each other in both the small and big car segment of
the market. What has make the competition even more beneficial for the
people who always wanted to own a car of their own but were unable to
make the investment in full on strict cash basis is the fact that all
the companies are now offering lease through their dealerships. In
addition, numerous auto-specific leasing companies offer to finance
new car purchase of many models to help purchase automobiles at one of
many individually-tailored plans.

The vital role leasing companies are playing to
pump the much needed cash flow in the local car industry is evident
from the fact that over 40 per cent of all new car sales are through
leasing. Without the active participation of leasing companies, both
company backed and individual, the car producers would not have access
to a market which remained dormant until recently.

Trends

Suzuki: For the half year ended December 31,
2000 Suzuki utilized just 31 per cent of its 50,000 annual plant
capacity on double-shift basis. During the half year it produced 7,676
units compared to 10,731 units during the corresponding period the
previous year. The sales declined by 22 per cent — 8,640 units were
sold compared to 11,052 units in the corresponding period the previous
year. Suzuki's pre- and post-tax loss increased for the half year
ended December 31, 2000 over the corresponding period the previous
year — the former increased from Rs 70 million to Rs 99 million
while the later increased from Rs 80 to Rs 116 million. This has been
way over the pre- and post-tax losses of the company for the year
ended June 30 last year which stood at Rs 1.9 million and Rs 26.6
million respectively. It may be mentioned that till 1999 Suzuki
managed to show an all around profitability — gross profit of Rs 663
million, operating profit of 410 million, pre-tax profit of Rs 339
million and post-tax profit of Rs 263 million.

In the half-year under discussion, Suzuki's gross
profit declined by 54.5 per cent from Rs 111 m to Rs 50.5 m. Suzuki
attributed its less-than-satisfactory financial performance on lower
production resulting in depressed demand due primarily to 'persistent
economic recession and new competition.' However, it is hopeful that
the launching of new Alto 1000 cc model in September last year and a
new-look Mehran 800 cc in January this year would help it arrest the
troubling trend. We have to wait for the annual report for the year
ended June 30 this year.

Indus Motor: Indus Motor's Toyota enjoyed a
healthy share of 53 % in the Toyota range of vehicles and 47 per cent
in the Hilux commercial category in the year 1999-2000. Since the
inception of its commercial production in May 1993, Indus has sold
over 50,000 vehicles till June 31 last year. In the half year ended
Dec. 31, 2000 Indus registered a healthy increase in sales which
increased to Rs 4.1 billion compared to Rs 3.4 billion in the
corresponding period the previous year; gross profit increased to Rs
255 million from Rs 215 million; and operating profit to Rs 143
million from Rs 111 million. The pre-tax profit increased to Rs 120
million from Rs 103 million while net profit increased to Rs 74
million from Rs 63.4 million.

Despite the overall profitability Indus Motor
expressed concerns that "while the overall profitability improved
over the corresponding period last year, it was however, lower than
projected due to the weakening of the Pakistani Rupee against the
Japanese Yen leading to higher input costs which could be only
partially off set by increasing the selling prices." It also
attributed the performance on the "sales turnover improved with
the addition of the Daihatsu Cuore to the company's product line-up
and the overall unit sales totalled over 6,000 units in the six months
period."

Last week Indus Motor announced to reduce the
prices of CL and Cx models of Cuore by Rs 40, 000 — CL is now priced
at Rs 349,000 and Cx for Rs 399,000. In addition, a special financing
offer on the two models is available at an affordable down payment of
just 15 per cent in addition to 3 per cent insurance.

Honda Atlas Cars (Pakistan): production increased
by 18 per cent from 14,891 units to 17,555 units. The company also
reported increase in its production by 68 per cent and attributed it
on better quality, appropriate model line up at competitive prices. It
reported increase in sales revenue from 1.3 billion to Rs 2 billion;
gross profit from Rs 164 m to Rs 217 million; operating profit from Rs
107 million to Rs 140 million, pre-tax profit from Rs 112 million to
Rs 152 million and after-tax profit increased from Rs 74 million to
over Rs 99 million. Honda Atlas attributed the overall profitability
to the improving of economic situation due in part to good wheat and
cotton crops.

Putting the passenger car production in the country
at 17,555 units during the half year ended December 31 last year,
Honda said that translated in to an 18 per cent increase over the
corresponding period the previous year. It claimed that 17,555 units
were produced compared to 14,891 units in the corresponding period the
previous year.

Dewan Farooque Motors sold 3,268 units. The pre-tax
profit totalled Rs 39.5 million and after-tax profit was Rs 32.5
million. The turnover was Rs 1,364 million, no comparative figure is
given in the un-audited half-year financial statement. Dewan Motors'
second plant started commercial production in January this year and
Kia Spectra was launched a month later. The company attributed the
reduction in its gross profit margin from 9.78 per cent for the year
ended June 30 and half year December 31 last year on the depreciation
of Pakistani Rupee against the Dollar.

The changing face of car and light commercial
market is all too evident with the heating up of the competition in
both the small and big- car segment of the market. Today the local
producers of Suzuki, Toyota & Cuore, Honda and Kia & Hyundai
cars are all vying the same market. Suzuki which commenced commercial
production seventeen years ago and till recently faced no competition
in 800-1000 cc market, Toyota which commenced commercial operations in
May 1993 and started producing Daihatsu's compact Cuore in March 2000,
Honda Atlas which followed it in July 1994, and Dewan Farooque Motors,
the producer of Kia and Hyundai cars and light commercial vehicles,
are all competing with each other.

Daihatsu: The competition in the small car
segment hot up with the entrance of 850 cc Daihatsu Cuore car in 1999.
Daihatsu has developed a Rs 750 million project in the premises of
Indus Motor at Port Qasim. Daihatsu Cuore has an agreement with Indus
Motor to market the Cuore cars in Pakistan.

Toyota Japan controls the majority shares of
Daihatsu Japan, the oldest Japanese manufacturer specialising in small
car segment for over 92 years. Karachi enjoys a distinction — it
houses the Toyota plant which is producing the Daihatsu car for the
first time anywhere in the world. The plant has the capacity to
produce 26,000 vehicles, including 10,000 Cuore cars, annually. This
capacity is based on double-shift basis but the company is operating
on single shift basis due to market demand.

Vending Industry

Like the car industry, the automobile component
industry is also in the process of transition in Pakistan to meet the
challenges, the emerging competition and demand for improved quality
and value. The auto parts vending industry comprises some 750 various
sized industries; large, medium and small. It provides jobs to half a
million people and Rs 20 billion investment.

Both the car producers and the vendors blame the
absence of consistent and long term policies by the successive
governments as the main reason for discouraging the investment and
growth of the auto industry.

Perhaps, vending industry in Pakistan is the most
deprived industry running strictly on self-financing basis. Auto
vendors are deprived of the credit facilities from the banks as they
are not seen as priority. Needless to say, neglecting the auto vending
industry is taking a heavy toll on the economy as oft-announced
deletion targets have never been achieved due in part to the inability
of the vendors to induct latest technology which needs heavy
financing.

Though there is a great demand for replacement
parts in the country, and though it differs from part to part,
precision engineered parts have to be imported from outside. That
explains why local manufacturers of oil and air filter are in a much
better position than for instance, the vendors producing a sheet metal
part which offers a limited after-sales market.

While Pakistani auto spare parts and components
have found a welcome niche in such developed markets as Germany,
Italy, UK, USA and Turkey — both as replacement parts as well as
original components in vehicles produced there, they are unable to
fully capitalize on the local market. The export of auto components
and parts is earning over $ 1.5 million for the country, though small
in terms of value, shows the potential that the local vending industry
has provided it is given the importance it deserves.

Smuggling

Over the years, the smuggling of vehicles,
components and replacement parts has become a part of the underground
economy of the country. Vehicles plying on the roads across the
country without number plates have become the norm. The previous, as
well as the present, governments attempted to tackle the problem by
giving a deadline to register the vehicles or face fine or
confiscation of the vehicle.

Vehicles, components and replacement parts worth
billions find their way in to the country thus depriving the
government of substantial revenues on the one hand and the undermining
the very base of local production. Not only the components and parts
are smuggled in to the country the they also find in to the country
under the legal cover of "used parts."*

It is also depriving the local car producers to
market their genuine parts, both imported and locally manufactured as
per the specifications of Original Equipment Manufacturers (OEMs), in
the replacement part market. In addition, it is discouraging the
development of the vending industry, comprise mainly of small and
medium size entrepreneurships, which can not survive on captive demand
for the components from the auto producers alone. Without access to
the local market, denied to it by the smuggled items, is depriving the
vending industry to develop and grow on sound footing.

Easy access of the smuggled components and spare
parts on shop floors across the country is undermining the local
vending as such fast moving auto accessories such as plugs, points,
lighting assemblies, air filters, oil filters, air conditioners,
compressors, fan belts, mud guards, etc., are routinely finding their
way into the country.

The heavy domination of the market by smuggled
parts is making it impossible for the buyers to even think of buying
components and parts produced locally, more so as national psyche
prefers all things foreign and the trade offers lucrative profits for
the retailers.

The local vending industry which comprises of some
750 manufacturers of all sizes and produces a variety of items
including precision engineering parts, sheet metal, radiators, body
parts, plastic parts, plugs, air and oil filters, employs some 500,000
persons directly or indirectly. The limited assembly market in
addition to loss of the major portion of the replacement parts market
is denying the local auto vending industry the push imperative for its
growth and to encourage investment. In fact, it is eroding the very
foundation of an industry still in the development phase.

Under-Utilisation of Production Capacity

Indus Motors bettered its production by 1,074 units
last year but managed to improve its sales by 695 units. It showed an
overall profitability but the profit margins were narrowed —
operating profit declined by over 43 per cent; pre-tax profit by 44
per cent; and net profit by 31 per cent.

On the other hand, Suzuki managed to produce just
20,404 units in 2000. Its sales also dipped to Rs 6.8 billion from
almost Rs 9 billion during the same period. Suzuki earn Rs 75 million
profit last year.

Suzuki's half-yearly report for the period ended
December 31, 2000 shows: Net sales declined by 8 per cent and gross
profit by 55 per cent. Operating loss has also increased.

The
under-utilisation of production capacity is
also an indicator of the problems the car producers are reeling from.
Suzki utilized just a little over 40 per cent of its 50,000
double-shift plant capacity last year. Indus, which expanded its
production capacity from 20,000 units to 26,000 units on two shift
basis, managed to use 43 per cent capacity last year.

The emergence of competition in the small car
segment in particular, and big car segment in general, now offers
wider choices to potential auto buyers in price as well as models. The
auto market in Pakistan is in the process of transformation for the
benefit of both the producers and buyers, a mutually beneficial
relation indeed. However, the annual reports of the major car
producers pose many challenges to the local car producers the not so
easy answers of which have to be find for not only the development and
growth but also the very survival of the auto and vending industry.